Analyst Note| Ioannis Pontikis, CFA |
Nestle reported first-quarter 2020 sales, with organic growth of 4.3% (real internal growth of 4.7%, pricing of negative 0.4%) ahead of company-compiled consensus estimates (2.3% real internal growth, 0.7% pricing). Growth was dispersed, with Americas and Europe, Middle East, and North Africa recording strong momentum, while Asia, Oceania, and sub-Saharan Africa reported negative growth due to consumers stockpiling in March and COVID-19-induced lockdowns in China. As a result, the retail channel's resilience more than offset the negative impact in the waters and professional segments. Petcare (up 13.9%) and prepared dishes and cooking aids (up 7.1%) were strong contributors, with confectionery lagging (down 4.2%). Management said it's too early to assess the full impact of COVID-19 but reiterated its guidance for the year, with "a continued improvement in organic growth and underlying trading operating profit margin." Danone withdrew its guidance in light of COVID-19 despite an equally strong quarter (organic growth up 3.7%). That said, these first-quarter trends do not capture an eventual normalization of stockpiling in developed economies and certain categories (in our estimates stockpiling has been a significant driver for petcare, which contributed almost half of this quarter's growth). In addition, with sales from premium products across categories estimated at around 26% of group sales and accounting for about 50% of Nestle's organic growth in fiscal 2019 in our calculations, we see heightened downside risks to midterm guidance from recession-driven downtrading to cheaper private-label alternatives. Our adjusted estimates call for about 3.5% organic growth versus more than 4% implied by guidance over the next three years. We maintain our CHF 91 fair value estimate after accounting for slower organic growth in fiscal 2020 and adverse currency movements, which are mostly offset by the time value of money. Shares trade in 2-star territory.